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March 15, 2012

Blistering Criticism of JOBS Bill May Push Senate Changes

SEC, NASAA, CFA criticized bill for damaging consumer protections

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A bill that started out as seven separate bills intended to benefit business startups and stimulate job creation has come in for so much criticism on its way to the Senate that opponents may prevail in strengthening consumer protections they say were trashed.

The House passed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act, with bipartisan support on March 8, in a vote of 390-23, but not without vocal opposition from critics that range from consumer advocates to former SEC officials. After passage, the bill was pilloried in the press, and opponents swung into action to push for changes in legislation they saw as presenting a golden opportunity for fraud and deception.

Provisions of the bill include crowdfunding and substantially lower requirements for SEC registration for companies with less than $1 billion in revenue. On March 14, Majority Whip Sen. Dick Durbin, D-Ill., called the crowdfunding language a “half-boiled concoction of ill-conceived ideas.”

Senate Democrats have said they plan to address a number of the concerns voiced by critics in their own version of the bill. The North American Securities Administrators Association (NASAA) said Wednesday that it hoped for additional legislative action in the Senate before the bill is put to a vote, with the possibility of an amendment introduced by Democrats concerned about the lower threshold of consumer protection contained in the House version of the bill.

Turner was quoted saying, “It won’t create jobs, but it will simplify fraud. This would be better known as the bucket-shop and penny-stock fraud reauthorization act of 2012.” Others have been critical of the bill as well, despite its support from the U.S. Chamber of Commerce, NYSE Euronext, Nasdaq OMX Group and Sen. Charles Schumer, D-N.Y. President Obama has supported a number of provisions in the bill.

In an opinion piece in The Washington Post, John Coates and Robert Cozen criticized the loosened regulations on crowdfunding, saying they “would make it easier for future Bernie Madoffs to create, say, 50 fake firms, steal $50 million from unsuspecting investors and retire to a tropical island.”

John Wasik said in a Forbes piece, “Does unfettered crowd funding and initial public stock offerings open the door to investment fraud? In the immortal words of philosopher Sarah Palin, ‘you betcha.’ While it sounds like one of those online innovations that may make capital available to a larger number of people, crowd funding could make the boiler room scams of the 1980s look like mere parking violations.”

Jesse Eisinger of ProPublica wrote in The New York Times Dealbook that it would provide help “for all the wrong people.”

Former SEC Chairman Arthur Levitt has criticized the bill, calling it a disgrace, as has Barbara Roper, director of investor protection for the Consumer Federation of America. John Nester, spokesman for Mary Schapiro, chairman of the SEC, said Schapiro “believes that portions of the legislation either unnecessarily eliminate important investor protections or are not balanced with sufficient safeguards.”

NASAA had previously sent a letter to Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Sen. Mitch McConnell, R-Ky., asking that they address a number of what it said were shortcomings in the bill, particularly with regard to crowdfunding, before passage.

NASAA was also critical of provisions that lessen audit requirements as well as the ability of state regulators to oversee companies’ efforts to raise capital. In addition, it said that many thresholds for consumer protection were too broad and eliminated important provisions for all but the largest of companies. In the letter, NASAA President Jack E. Herstein urged the Senate to address what he characterized as several critical weaknesses of the House bill.

“While NASAA applauds Congress’ desire to facilitate access to capital for new and small businesses, the version of the bill that passed the House is deeply flawed,” Herstein wrote. “State securities regulators support efforts by Congress to ensure that laws facilitating the raising of capital are modern and efficient, and that Americans are encouraged to raise money to invest in the economy. However, it is critical that in doing so, Congress not discard basic investor protections. Investment fraud is real, and it can be particularly pervasive in small exempted offerings.”